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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13788
THOMAS NELSON, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-0679364
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
501 Nelson Place, Nashville, Tennessee 37214-1000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 889-9000
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
At February 7, 2005, the Registrant had outstanding 13,822,043 shares of
Common Stock and 924,662 shares of Class B Common Stock.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
THOMAS NELSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(000's omitted, except share amounts, unaudited)
December 31, March 31, December 31,
2004 2004 2003
------------- ------------- ------------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 21,007 $ 22,780 $ 6,319
Accounts receivable, less
allowances of $9,147, $7,951
and $9,459, respectively 57,992 56,275 55,552
Inventories 36,850 30,341 35,557
Prepaid expenses 16,527 14,018 12,828
Assets held for sale - - 1,615
Deferred tax assets 4,923 4,923 5,085
------------- ------------- ------------
Total current assets 137,299 128,337 116,956
Property, plant and equipment, net 13,018 13,039 12,188
Deferred charges 1,317 1,754 2,080
Goodwill, net 29,304 29,304 29,304
Other intangible assets 1,123 860 840
Other assets 9,197 6,425 6,440
------------- ------------- ------------
Total Assets $191,258 $179,719 $167,808
============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,457 $ 19,753 $ 20,305
Accrued expenses 10,113 13,278 9,991
Deferred revenue 6,394 11,758 7,171
Dividends payable 737 579 576
Income taxes currently payable 6,989 2,419 3,452
Current portion of long-term debt 2,308 3,022 3,022
------------- ------------- ------------
Total current liabilities 48,998 50,809 44,517
Long term debt, less current portion - 2,308 2,308
Long term taxes payable 21,890 21,290 20,884
Deferred tax liabilities 1,021 1,021 721
Other liabilities 852 1,300 821
Minority interest 12 9 9
Shareholders' equity:
Preferred stock, $1.00 par value,
authorized 1,000,000 shares;
none issued - - -
Common stock, $1.00 par value,
authorized 20,000,000 shares;
Issued 13,819,043; 13,502,855 and
13,411,661 shares, respectively 13,819 13,503 13,412
Class B stock, $1.00 par value,
aughorized 5,000,000 shares;
Issued 924,662; 963,195 and
999,195 shares, respectively 925 963 999
Additional paid-in capital 48,211 44,697 44,279
Retained earnings 55,530 43,819 39,858
------------- ------------- ------------
Total sharesholders' equity 118,485 102,982 98,548
------------- ------------- ------------
Total Liabilities and
Shareholders' Equity $191,258 $179,719 $167,808
============= ============= ============
(See Notes to Condensed Consolidated Financial Statements)
THOMAS NELSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(000's omitted, except per share data, unaudited)
Three Months Ended Nine Months Ended
December, 31, December 31,
------------------ ------------------
2004 2003 2004 2003
------- ------- -------- --------
Net revenues $63,355 $56,045 $174,265 $161,705
Costs and expenses:
Cost of goods sold 34,983 32,200 99,054 94,251
Selling, general and administrative 18,818 16,352 50,644 45,999
Depreciation and amortization 649 563 1,864 1,683
------- ------- -------- --------
Total costs and expenses 54,450 49,115 151,562 141,933
------- ------- -------- --------
Operating income 8,905 6,930 22,703 19,772
Other income (expense) 118 (439) 267 (260)
Interest expense 148 229 550 716
------- ------- -------- --------
Income from continuing operations
before income taxes 8,875 6,262 22,420 18,796
Provision for income taxes 3,417 2,349 8,632 7,049
Minority interest 1 (37) 3 (34)
------- ------- -------- --------
Income from continuing operations 5,457 3,950 13,785 11,781
Discontinued operations:
Gain (loss) on disposal,
net of applicable taxes 11 - (22) (156)
------- ------- -------- --------
Net income $ 5,468 $ 3,950 $ 13,763 $ 11,625
======= ======= ======== ========
Weighted average number
of shares outstanding
Basic 14,720 14,403 14,612 14,393
======= ======= ======== ========
Diluted 15,206 15,140 15,087 14,777
======= ======= ======== ========
Net income per share, Basic:
Income from continuing operations $ 0.37 $ 0.27 $ 0.94 $ 0.82
Loss from discontinued operations - - - (0.01)
------- ------- -------- --------
Net income per share $ 0.37 $ 0.27 $ 0.94 $ 0.81
======= ======= ======== ========
Net income per share, Diluted:
Income from continuing operations $ 0.36 $ 0.26 $ 0.91 $ 0.80
Loss from discontinued operations - - - (0.01)
------- ------- -------- --------
Net income (loss) per share $ 0.36 $ 0.26 $ 0.91 $ 0.79
======= ======= ======== ========
(See Notes to Condensed Consolidated Financial Statements)
THOMAS NELSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Nine Months Ended
December 31,
-------------------
2004 2003
-------- --------
Cash Flows From Operating Activities:
Net income from continuing operations $13,785 $11,781
Adjustments to reconcile income to net cash
provided by (used in) operations:
Depreciation and amortization 1,864 1,683
Amortization of deferred financing fees 135 157
Loss on sale of fixed assets and assets
held for sale 16 21
Minority interest 3 (34)
Changes in assets and liabilities,
net of acquisitions and disposals:
Accounts receivable, net (1,717) 588
Inventories (6,509) 2,231
Prepaid expenses (2,509) 727
Accounts payable and accrued expenses (400) (3,882)
Deferred revenue (5,364) (4,322)
Income taxes currently payable 4,570 1,073
Change in other assets and liabilities and
deferred charges (2,853) 1,763
Tax benefit of non-qualified stock options
exercised, credited to additional paid-in capital 1,202 -
-------- --------
Net cash provided by continuing operations 2,223 11,786
-------- --------
Discontinued Operations:
Loss from discontinued operations (22) (156)
Income tax payable 600 20,884
Change in discontinued net assets (61) 195
-------- --------
Net cash provided by (used in) discontinued operations 517 20,923
-------- --------
Net cash provided by operating activities 2,740 32,709
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (1,837) (2,261)
Net proceeds from sales of property, plant
and equipment and assets held for sale - 45
Purchase of net assets of acquired company - (4,559)
Acquisition of publishing rights (350) (375)
-------- --------
Net cash used in investing activities (2,187) (7,150)
-------- --------
Cash Flows From Financing Activities:
Payments under revolving credit facility - (17,000)
Payments on long-term debt (3,022) (3,622)
Proceeds from issuance of common stock 2,590 251
Dividends paid (1,894) (576)
-------- --------
Net cash used in financing activities (2,326) (20,947)
-------- --------
Net increase (decrease) in cash and cash equivalents (1,773) 4,612
Cash and cash equivalents at beginning of period 22,780 1,707
-------- --------
Cash and cash equivalents at end of period $21,007 $ 6,319
-------- --------
Supplemental cash flow information:
Dividends accrued and unpaid $ 737 $ 576
Interest paid, net $ 619 $ 1,025
Income taxes paid (refunded), net $ 2,260 ($12,840)
(See Notes to Condensed Consolidated Financial Statements)
THOMAS NELSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (which are of a normal recurring nature) that are, in
the opinion of management, necessary for a fair statement of the results for
the interim periods presented. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to Securities and
Exchange Commission rules and regulations. The statements should be read in
conjunction with the Summary of Significant Accounting Policies and notes to
the consolidated financial statements included in the Company's annual report
for the year ended March 31, 2004.
The condensed consolidated balance sheets and related information in these
notes as of March 31, 2004 have been derived from the audited consolidated
financial statements as of that date. Certain reclassifications of prior
period amounts have been made to conform to the current period's presentation.
Total comprehensive income and net income are the same for all periods
presented.
Note B - Stock-Based Compensation
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25, issued in March 2000,
to account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. SFAS No. 123, Accounting
for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based
employee compensation plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic-value-based method of accounting
described above and has adopted only the disclosure requirements of SFAS
No. 123. The following table illustrates the effect on net income if the
fair-value-based method had been applied to all outstanding and unvested
awards in each period.
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (in thousands):
As reported $5,468 $3,950 $13,763 $11,625
======== ======== ======== ========
Less: additional stock-based
employee compensation expense
determined under fair-value
based method for all awards,
net of related tax effects 494 524 1,361 1,396
======== ======== ======== ========
Pro forma $4,974 $3,426 $12,402 $10,229
======== ======== ======== ========
Net income per share:
Basic -- As reported $ 0.37 $ 0.27 $ 0.94 $ 0.81
======== ======== ======== ========
Pro forma $ 0.34 $ 0.24 $ 0.85 $ 0.71
======== ======== ======== ========
Diluted -- As reported $ 0.36 $ 0.26 $ 0.91 $ 0.79
======== ======== ======== ========
Pro forma $ 0.33 $ 0.23 $ 0.82 $ 0.69
======== ======== ======== ========
The fair value of each option on its date of grant has been estimated for
pro forma purposes using the Black-Scholes option pricing model using the
following weighted average assumptions:
December 31, 2004 December 31, 2003
----------------- -----------------
Expected annual future dividend payment $0.16 per share $0.16 per share
Expected stock price volatility 46.05% 40.24%
Risk free interest rate 4.53% 5.35%
Expected life of options 9 years 9 years
Note C - Inventories
Components of inventories consisted of the following (in thousands):
December 31, March 31, December 31,
2004 2004 2003
------------- ------------- -------------
Finished goods $34,265 $28,000 $33,461
Raw materials and work in process 2,585 2,341 2,096
------------- ------------- -------------
$36,850 $30,341 $35,557
============= ============= =============
Note D - Operating Segments
The Company is organized and managed based upon its products and services.
The Company has identified two reportable business segments: publishing and
conferences. The publishing segment primarily creates and markets Bibles,
inspirational and family oriented books and videos. The conference segment
hosts inspirational and motivational conferences across North America.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The "Other" column consists of items
related to discontinued operations (in thousands).
For the Three Months Ended Publishing Conferences Other Total
- -------------------------- ----------- ----------- ----------- --------
December 31, 2004:
Net Revenues $ 53,529 $ 9,826 $ 63,355
Operating Income 7,297 1,608 8,905
Capital Expenditures 1,111 47 1,158
Depreciation and Amortization 593 56 649
December 31, 2003:
Net Revenues $ 46,912 $ 9,133 $ 56,045
Operating Income 5,493 1,437 6,930
Capital Expenditures 784 6 790
Depreciation and Amortization 497 66 563
For the Nine Months Ended
- -------------------------
December 31, 2004:
Net Revenues $144,963 $29,302 $174,265
Operating Income 19,091 3,612 22,703
Identifiable Assets 168,997 20,261 $2,000 191,258
Capital Expenditures 1,742 95 1,837
Depreciation and Amortization 1,696 168 1,864
December 31, 2003:
Net Revenues $136,669 $25,036 $161,705
Operating Income 16,762 3,010 19,772
Identifiable Assets 143,029 21,164 $3,615 167,808
Capital Expenditures 2,180 81 2,261
Depreciation and Amortization 1,488 195 1,683
Fiscal Year Ended March 31, 2004:
- ---------------------------------
Net Revenues $193,161 $29,458 $222,619
Operating Income 24,823 2,317 27,140
Goodwill 14,169 15,135 29,304
Assets Excluding Goodwill 143,510 4,905 $ 2,000 150,415
Total Assets 157,679 20,040 2,000 179,719
Capital Expenditures 3,569 97 3,666
Depreciation and Amortization 2,028 259 2,287
Net revenues from conferences include event ticket sales of $20.9 million,
$18.7 million and $21.9 million for the nine months ended December 31, 2004
and 2003 and the fiscal year ended March 31, 2004, respectively.
Note E - Long-Term Taxes Payable
Long-term taxes payable at December 31, 2004 include a liability which
resulted from an income tax refund of $18.7 million received in April 2003.
This tax refund was related to the disposal of the Company's C.R. Gibson gift
division and was used to pay down existing debt. Further, the Company has
reduced subsequent income tax payments by approximately $3.2 million related to
additional tax credits generated by the tax loss realized on the disposal of
C.R. Gibson. Until such time that the Company can conclude that the position
taken on its income tax returns will ultimately be sustained by the taxing
authorities, the refund and the tax credits will be recorded as a non-current
tax liability. If the Company's position is sustained, the Company will
recognize the refund and the tax credits as income from discontinued operations.
Note F - Debt
The Company's bank credit facility consists of a $50 million Senior
Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit
Facility bears interest at either the lenders' base rate or, at the Company's
option, the LIBOR plus a percentage, based on certain financial ratios. The
Credit Facility has a term of three years and matures on October 15, 2008. At
December 31, 2004, the Company had no outstanding borrowings under the Credit
Facility.
At December 31, 2004, the Company had outstanding approximately $2.3
million in unsecured senior notes ("Senior Notes"). The Senior Notes bear
interest at 6.68% due through December 2005.
Under the terms of the Credit Facility and the Senior Notes, the Company
has agreed to limit the payment of dividends and to maintain certain financial
ratios and tangible net worth, which are similarly calculated for each debt
agreement. At December 31, 2004, the Company was in compliance with all
covenants of these debt agreements.
Note G - Royalty Advances
At December 31, 2004, March 31, 2004 and December 31, 2003, prepaid
expenses include $12.3 million, $9.2 million and $9.1 million, respectively, of
royalty advances for products that have been released to the market or are
expected to be released within the next twelve months. At December 31, 2004,
March 31, 2004 and December 31, 2003, other assets include $5.0 million, $2.3
million and $2.3 million, respectively, for royalty advances for products not
expected to be released to the market within the next twelve months.
Note H - Common Stock
Declaration of dividends is within the discretion of the Board of
Directors of the Company. The Board considers the payment of dividends on a
quarterly basis, taking into account the Company's earnings and capital
requirements, as well as financial and other conditions at the time. Certain
covenants of the Company's Credit Facility and Senior Notes limit the amoun
of cash dividends payable based on the Company's cumulative consolidated net
income.
The following table indicates dividend activity for the nine-month period
ended December 31, 2004. Dividends relate to both Common Stock and Class B
Common Stock.
Declaration Date Dividend Per Share Record Date Payment Date
---------------- ------------------ --------------- ----------------
May 20, 2004 $0.04 July 5, 2004 July 19, 2004
August 19, 2004 $0.05 October 7, 2004 October 21, 2004
November 18, 2004 $0.05 January 6, 2005 January 20, 2005
Class B Common Stock carries ten votes per share, compared to one vote
per share for Common Stock, and is convertible to Common Stock on a one-to-one
ratio at the election of the holder. The Class B and Common Stock are
identical in all other material respects.
Note I - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share amounts):
Three Months Ended Nine Months Ended
December 31, December 31,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income $ 5,468 $ 3,950 $13,763 $11,625
======== ======== ======== ========
BASIC EARNINGS PER SHARE:
Weighted average shares
outstanding 14,720 14,403 14,612 14,393
======== ======== ======== ========
Net income per share $ 0.37 $ 0.27 $ 0.94 $ 0.81
======== ======== ======== ========
DILUTED EARNINGS PER SHARE:
Basic weighted average shares
outstanding 14,720 14,403 14,612 14,393
Dilutive stock options -
based on treasury stock
method using the average
market price 486 737 475 384
-------- -------- -------- --------
Total weighted average diluted
shares 15,206 15,140 15,087 14,777
======== ======== ======== ========
Net income per share $ 0.36 $ 0.26 $ 0.91 $ 0.79
======== ======== ======== ========
For the three months and nine months ended December 31, 2004 there were
no anti-dilutive options outstanding. For the three months ended December 31,
2003, there were 51,000 anti-dilutive options outstanding; and for the nine
months ended December 31, 2003, there were 95,184 anti-dilutive options
outstanding. As of December 31, 2004, there were no other securities
outstanding that could potentially dilute basic earnings per share in the
future.
Note J - Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 123R ("Share-Based Payment").
SFAS 123R requires the Company to recognize compensation expense for equity
instruments awarded to employees. SFAS 123R is effective for the Company as
of the beginning of the first interim period that begins after June 15, 2005.
The Company is currently evaluating the impact that this pronouncement will
have on it future operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Executive Summary
Thomas Nelson, Inc. publishes Bibles and books and hosts inspirational
conferences, designed to appeal to the Christian and family-oriented lifestyle
segments of the population. The Company's business strategy is to publish
high-quality products and offer related conference services for the Christian
and general retail markets. Thomas Nelson's Common Stock and Class B Common
Stock are listed on the New York Stock Exchange under the symbols TNM and
TNMB, respectively. More information can be found in our Annual Report on
Form 10-K, available at our website: www.thomasnelson.com.
Net revenues for the quarter ending December 31, 2004 were up 13% in
comparison to the comparable quarter in the prior year. Publishing net
revenues were up 14% in the quarter. The revenue performance for publishing
products reflect increased front list (products released in the current fiscal
year) and backlist (products released prior to the current fiscal year) sales
across most all of our product lines (imprints). Most major market channels
also demonstrated improvement over the prior year. Given this strength across
our product lines, we believe the sales gains reflect overall market
improvements as well as our delivery of quality products to the marketplace.
Thomas Nelson, Inc. had seven of the top 10 books according to the
January 3, 2005 point-of-sale data generated by Sales Tracking Analysis Trends
Summary (STATS) compiled by the Evangelical Christian Publishers Association.
Thomas Nelson is the only publisher to have multiple products in the top 10.
Analyzing the STATS results further past the top 10 titles shows continued
domination, with 18 of the top 50 products claimed by Thomas Nelson - more
than double the number of the nearest competitor's best sellers.
In addition, Thomas Nelson Publishers also has a general market best
seller in "The Total Money Makeover" (Nelson Books) by Dave Ramsey, which ranks
on the "New York Times" Business Best Sellers list at #11 as of January 2,
2005. Thomas Nelson also had three titles on the "Publisher's Weekly" Religion
Hardcover Best Seller list for December including #3 "Epic" (Nelson Books) by
John Eldredge, #6 "Come Thirsty" (W Publishing) by Max Lucado and #7 "Wild at
Heart" (Nelson Books) by John Eldredge.
Net revenues from conferences increased 8%, compared to the prior
year's quarter. This improvement relates to hosting conferences at larger
venues and increased attendance this quarter compared to the prior period.
There were the same number of conferences held in both periods.
This summary should be read together with the complete Management's
Discussion and Analysis and the related financial statements and notes
thereto.
Cautionary Note On Forward-Looking Statements
The following discussion includes certain forward-looking statements
(all statements other than those made solely with respect to historical fact)
and the actual results may differ materially from those contained in the
forward-looking statements due to known and unknown risks and uncertainties.
Any one or more of several risks and uncertainties could account for differences
between the forward-looking statements that are made today and the actual
results, including with respect to our sales, profits, liquidity and capital
position. These factors include, but are not limited to: risks relating to
our ability to satisfy regulatory requirements with respect to our internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act
of 2002, which requires us to perform an evaluation of our internal control
over financial reporting and have our auditor attest to such evaluation;
softness in the general retail environment or in the markets for our products;
the timing and acceptance of products being introduced to the market; the level
of product returns experienced; the level of margins achievable in the
marketplace; the collectibility of accounts receivable; the recoupment of
royalty advances; the effects of acquisitions or dispositions, the financial
condition of our customers and suppliers; the realization of inventory values
at carrying amounts; our access to capital; the outcome of any future Internal
Revenue Service audits; and the realization of income tax and intangible
assets. These conditions cannot be predicted reliably and the Company may
adjust its strategy in light of changed conditions or new information.
Thomas Nelson disclaims any obligation to update forward-looking statements.
OVERVIEW
- --------
The following table sets forth for the periods indicated certain selected
statements of income data of the Company expressed as a percentage of net
revenues and the percentage change in dollars in such data from the prior
fiscal year.
Nine Months Ended
December 31, Fiscal Year-to-Year
----------------- Increase
2004 2003 (Decrease)
------- ------- -------------------
(%) (%) (%)
Net revenues:
Publishing 83.2 84.5 6.1
Conferences 16.8 15.5 17.0
------- ------- -------------------
Total net revenues 100.0 100.0 7.2
Expenses:
Cost of goods sold 56.8 58.3 5.1
Selling, general and administrative 29.1 28.5 10.1
Depreciation and amortization 1.1 1.0 10.8
------- ------- -------------------
Total expenses 87.0 87.8 6.8
------- ------- -------------------
Operating income 13.0 12.2 14.8
------- ------- -------------------
Net income 7.9 7.2 18.4
======= ======= ===================
The Company's net revenues fluctuate seasonally, with net revenues in the
first fiscal quarter historically being lower than those for the remainder of
the year. This seasonality is the result of increased consumer purchases of
the Company's products during the traditional holiday periods. In addition,
the Company's quarterly operating results may fluctuate significantly due to
the seasonality of new product introductions, the timing of selling and
marketing expenses and changes in sales and product mixes.
Results of Operations
Consolidated Results - Third Quarter of Fiscal 2005
Compared with Third Quarter of Fiscal 2004
-------------------------------------------
Net revenues for the quarter ending December 31, 2004 increased to $63.4
million from $56 million in the prior year, a 13% increase in comparison to
the comparable quarter in the prior year. Publishing net revenues were up 14%
in the quarter. The revenue performance for publishing products reflected
increased frontlist (products released in the current fiscal year) and
backlist (products released prior to the current fiscal year) sales across
most all of our product lines (imprints). Most major market channels also
demonstrated improvement over the prior year. Given this strength across our
product lines, we believe the sales gains reflect overall market improvements
as well as our delivery of quality products to the marketplace. Net revenues
from conferences increased 8%, compared to the prior year's quarter. This
improvement relates to hosting conferences at larger venues and increased
attendance this quarter compared to the prior period. The same number of
conferences were held in both periods. Price increases did not have a
material effect on net revenues.
The Company's cost of goods sold increased for the three months ended
December 31, 2004 by $2.8 million, or 9% from the same period in the prior
year, and as a percentage of net revenues, decreased from 57% to 55%. The
improvement in cost of goods sold as a percentage of net revenues is primarily
attributable to improved recovery on sales of excess publishing product
inventories and improved recovery of royalty advances on publishing products.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the three months ended December 31, 2004 increased $2.5
million, or 15% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, increased from 29% to 30%. The
increase in dollars and percentage over the prior year is primarily
attributable to additional expenditures required for compliance with the
Sarbanes-Oxley Act, planned increases in advertising, variable expenses that
increased in relation to net revenues, and overhead investments in certain
publishing areas for future growth, such as fiction, curriculum, World
Publishing and direct to school sales programs.
Depreciation and amortization increased slightly from the prior period
due to building improvements last year.
The provision for income taxes has been increased from 37.5% to 38.5%
for the current fiscal year due to increased business activity in states with
higher income tax rates without the benefit of state net operating loss carry
forwards that existed in prior periods, and accruals for other tax items.
Consolidated Results - First Nine Months of Fiscal 2005
Compared with the First Nine Months of Fiscal 2004
--------------------------------------------------
Net revenues for the nine months ended December 31, 2004 increased
$12.6 million, or 8%, from the same period in the prior year. Net revenues
from publishing products increased $8.3 million, or 6%, primarily due to a
strong performance by the book divisions and increased revenues from the
September 19, 2003 acquisition of World Publishing. Net revenues from
conferences increased $4.3 million or 17%, primarily due to hosting one
additional conference in the current period, a mix of larger venues, and
increased attendance and product sales. Price increases did not have a
material effect on net revenues.
The Company's cost of goods sold increased for the nine months ended
December 31, 2004 by $4.8 million, or 5% from the same period in the prior
year, and as a percentage of net revenues, decreased to 57% from 58% in the
prior year. Improvement in the cost of goods sold as a percentage of net
revenues for publishing products was partially offset by a planned increase in
cost of products sold at conferences to attempt to increase volume and total
profit at conference events. The improvement for publishing products was
primarily attributable to improved recovery on sales of excess inventories and
improved recovery of royalty advances.
Selling, general and administrative expenses, excluding depreciation and
amortization, for the nine months ended December 31, 2004 increased
$4.6 million, or 10% from the same period in the prior year. These expenses,
expressed as a percentage of net revenues, increased to 29% from 28% in the
prior year period. The increase in dollars and percentage over the prior year
is primarily attributable to additional expenditures required for compliance
with the Sarbanes-Oxley Act, planned increases in advertising, variable
expenses that increased in relation to net revenues, and overhead investments
in certain publishing areas for future growth, such as fiction, curriculum,
World Publishing and direct to school sales programs.
Depreciation and amortization increased slightly from the prior period
due to building improvements last year.
Interest expense for the nine months ended December 31, 2004 was
$0.6 million, a decrease of $0.2 million from the same period in the prior
year due to lower debt levels.
The provision for income taxes has been increased from 37.5% to 38.5%
for the current fiscal year due to increased business activity in states with
higher income tax rates without the benefit of state net operating loss carry
forwards that existed in prior periods, and accruals for other tax items.
Liquidity and Capital Resources
- -------------------------------
At December 31, 2004, the Company had approximately $21.0 million in cash
and cash equivalents. The primary sources of liquidity to meet the Company's
future obligations and working capital needs are cash generated from operations
and borrowings available under bank credit facilities. At December 31, 2004,
the Company had working capital of $88.3 million.
Net cash provided by continuing operations was $2.2 million for the nine
months ended December 31, 2004 and $11.8 million for the same period last year.
Cash provided by continuing operations during the nine months ended December
31, 2004 was principally attributable to net income offset by an increase in
inventory and royalty advances and a decrease in deferred revenue. The
increase in inventory is due to the seasonality of our publishing business and
timing of new publishing product releases, and the increase in royalty advances
relates to the signing of certain key authors to new multi-book agreements. The
reduction in deferred revenue from March 31, 2004 related to the end of our
calendar year conference events. Cash provided by continuing operations during
the nine months ended December 31, 2003 was principally attributable to net
income from continuing operations.
In April 2003, the Company received an income tax refund of $18.7 million.
This tax refund was related to the recognition of a loss on disposal of the
Company's C.R. Gibson gift division and was used to pay down debt. Further,
the Company has reduced subsequent income tax payments by approximately
$3.2 million related to additional tax credits generated by the tax loss
realized on the disposal of C.R. Gibson. Until such time that we conclude
that the position taken on our income tax returns will ultimately be sustained
by the taxing authorities, the refund and the tax credits will be recorded as
a non-current tax liability. If the Company's position is sustained, the
Company will recognize the refund and the tax credits as income from
discontinued operations.
Fiscal year-to-date capital expenditures have totaled approximately
$1.8 million, primarily consisting of building improvements, computer software
and equipment. During the remainder of fiscal 2005, the Company anticipates
capital expenditures of approximately $2.2 million, primarily consisting of
building improvements and computer software and equipment.
The Company's bank credit facility consists of a $50 million Senior
Unsecured Revolving Credit Facility (the "Credit Facility"). The Credit
Facility bears interest at either the lenders' base rate or, at the Company's
option, the LIBOR plus a percentage, based on certain financial ratios. The
Credit Facility has a term of three years and matures on October 15, 2008. At
December 31, 2004, the Company had no outstanding borrowings and $50 million
available to borrow under the Credit Agreement.
At December 31, 2004, the Company had outstanding approximately $2.3
million of unsecured senior notes ("Senior Notes"). The Senior Notes bear
interest at 6.68% due through December 2005.
Under the terms of the Credit Facility and the Senior Notes, the Company
has agreed to limit the payment of dividends and to maintain certain financial
ratios and tangible net worth. At December 31, 2004, the Company was in
compliance with all covenants of these debt agreements.
On February 3, 2004, the Company received a letter from one of its former
customers that has filed for Chapter 11 bankruptcy. It indicated that the
Company may have received preferential transfers, in the form of cash and
returned books, totaling approximately $1.7 million. We are evaluating the
notice and intend to vigorously defend the matter. While resolution of this
matter is not expected to materially affect the Company's liquidity, if all or
a portion of these amounts were to be repaid, it would reduce the Company's
net income in the amount of the repayment, net of tax.
Management believes cash generated by operations and borrowings available
under the Credit Facility will be sufficient to fund anticipated working
capital requirements for existing operations through the remainder of fiscal
2005. The Company's current cash commitments include current maturities of
debt and operating lease obligations that are disclosed in the Company's
Annual Report on Form 10-K as of and for the year ended March 31, 2004. The
Company also has current inventory purchase and royalty advance commitments in
the ordinary course of business that require cash payments as vendors and
authors fulfill their requirements to the Company in the form of delivering
satisfactory product orders and manuscripts, respectively. The Company has no
off-balance sheet commitments or transactions with any variable interest
entities. Management also is not aware of any undisclosed material related
party transactions or relationships with management, officers or directors.
Payments Due by Fiscal Year
Contractual ------------------------------------------------------------
Commitments Remainder 2009 and
(in 000's) of 2005 2006 2007 2008 Thereafter Total
- ------------------ -------- -------- -------- -------- ---------- --------
Long-term debt $ - $ 2,308 $ - $ - $ - $ 2,308
Inventory purchases 776 5,000 5,000 5,000 4,583 20,359
Operating leases 404 1,089 652 1,121 4,898 8,164
Royalty advances 4,181 3,926 1,963 910 2,498 13,478
-------- -------- -------- -------- ---------- --------
Total obligations $5,361 $12,323 $7,615 $7,031 $11,979 $44,309
======== ======== ======== ======== ========== ========
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123R ("Share-Based
Payment"). SFAS 123R requires the Company to recognize compensation expense
for equity instruments awarded to employees. SFAS 123R is effective for the
Company as of the beginning of the first interim period that begins after
June 15, 2005. The Company is currently evaluating the impact that this
pronouncement will have on it future operations.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. The Company bases its
estimates on historical experience and on various assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that
are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its condensed consolidated
financial statements. These policies are common with industry practice and are
applied consistently from period to period.
Revenue Recognition: The Company has four primary revenue sources: sales
of publishing product, attendance fees and product sales from its conferences,
royalty income from licensing copyrighted material to third parties and billed
freight. Revenue from the sale of publishing product is recognized upon
shipment to the customer or when title passes. In accordance with Securities
and Exchange Commission's Staff Accounting Bulletin No. 104 regarding revenue
recognition, we recognize revenue only when all of the following criteria are
met: persuasive evidence of an arrangement exists; delivery has occurred or
services have been rendered; the seller's price to the buyer is fixed or
determinable; and collectibility is reasonably assured. An allowance for sales
returns is recorded where return privileges exist. The returns allowance is
determined by using a 12-month rolling average return rate, multiplied by gross
sales occurring over the previous four-month period by market sales channel.
Historical experience reflects that product is generally returned from and
credited to customers' accounts within the first 120 days of the original sale.
The full amount of the returns allowance, net of inventory and royalty costs
(based on current gross margin rates) is shown as a reduction of accounts
receivable in the accompanying condensed consolidated financial statements.
Returns of publishing products from customers are accepted in accordance with
standard industry practice. Generally, products that are designated as
out-of-print are not returnable 90 days after notice of out-of-print status is
given to the customer. Also, certain high discount sales are not returnable.
Revenue from conferences is recognized as the conferences take place. Cash
received in advance of conferences is included in the accompanying condensed
consolidated financial statements as deferred revenue. Royalty income from
licensing the Company's publishing rights is recorded as revenue when earned
under the terms of the applicable license, net of amounts due to authors.
Billed freight consists of shipping charges billed to customers and is recorded
as revenue upon shipment of product.
Allowance for Doubtful Accounts: The Company records an allowance for bad
debts as a reduction to accounts receivable in the accompanying condensed
consolidated financial statements. The valuation allowance has a specific
component related to accounts with known collection risks and a component which
is calculated using a 5-year rolling bad debt history applied as a percentage
of the accounts receivable balance, less the specific component of the
allowance. Our credit department identifies specific allowances for each
customer who is deemed to be a collection risk, may have filed for bankruptcy
protection or may have disputed amounts with the Company.
Inventories: Inventories are stated at the lower of cost or market value
using the first-in, first-out (FIFO) valuation method. The FIFO method of
accounting for inventory was selected to value our inventory at the lower of
market value or current cost because the Company continuously introduces new
products, eliminates existing products and redesigns products. Therefore,
inflation does not have a material effect on the valuation of inventory. Costs
of producing publishing products are included in inventory and charged to
operations when product is sold or otherwise disposed. These costs include
paper, printing, binding, outside editorial and design, typesetting, artwork,
international freight and duty costs, when applicable. The Company's policy
is to expense all internal editorial, production, warehousing and domestic
freight-in costs as incurred, except for certain indexing, stickering,
typesetting and assembly costs, which are capitalized into inventory. Costs
of abandoned publishing projects are charged to operations when identified.
The Company also maintains an allowance for excess and obsolete inventory as a
reduction to inventory in the accompanying condensed consolidated financial
statements. This allowance is based on historical liquidation recovery rates
applied to inventory quantities identified in excess of a twenty-four month
supply on hand for each category of product.
Royalty Advances/Pre-Production Costs: Royalty advances are typically
paid to authors, as is standard in the publishing industry. These advances
are either recorded as prepaid assets or other (non-current) assets in the
accompanying condensed consolidated financial statements, depending on the
expected publication date (availability for shipment) of the product. Author
advances for trade books are generally amortized over five months beginning
when the product is first sold into the market. The Company's historical
experience is that typically 75% to 80% of book product sales occur within the
first five months after release into the market. Reference and video royalty
advances are generally amortized over a twelve-month period beginning with the
first sale date of the product, as these products typically have a longer
sales cycle than books. Royalty advances for significant new Bible products
are amortized on a straight-line basis for a period not to exceed five years
(as determined by management).
When royalty advances are earned through product sales at a faster pace
than the amortization period, the amortization expense is accelerated to match
the royalty earnings. All abandoned projects and advances that management
does not expect to fully recover are charged to operations when identified.
For authors with multiple book/product contracts, the advance is
amortized over a period that encompasses the publication of all products,
generally not to exceed 24 months or the actual recovery period, whichever is
shorter. Advances to our most important authors are typically expensed as
they are recovered through sales. These authors generally have multiple year
and multiple book contracts, as well as strong sales history of backlist
titles (products published during preceding fiscal years) that can be used to
recover advances over long periods of time.
Many Bible, reference and video products require significant development
costs prior to the actual printing or production of the saleable product.
These products also typically have a longer life cycle. All video pre-
production costs are amortized over 12 months on a straight-line basis. Pre-
production costs for significant Bible and reference products are recorded as
deferred charges in the accompanying condensed consolidated financial
statements and are amortized on a straight-line basis, for a period not to
exceed five years (as determined by management).
Goodwill and Intangible Assets: In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that
goodwill no longer be amortized, but tested for impairment by comparing net
book carrying values to fair market values upon adoption and periodically
thereafter. The Company has adopted the provisions of SFAS No. 142 as of
April 1, 2001. In accordance with SFAS No. 142, goodwill is tested for
impairment by the Company's reporting units: Publishing and Conferences. The
fair value for the assets of the Publishing and Conferences reporting units
are evaluated using discounted expected cash flows and current market
multiples. Unless circumstances dictate an earlier analysis, we will conduct
our annual goodwill impairment test in our fourth fiscal quarter.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As of and for the period ended December 31, 2004, there have been no
material changes in the Company's investment strategies, types of financial
instruments held or the risks associated with such instruments which would
materially alter the market risk disclosures made in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2004.
The Company invoices and collects all freight sales and makes purchases
from overseas in U.S. dollars. Accordingly, the Company's customers and
vendors bear all material currency exchange risks.
Item 4. Controls and Procedures
The Chairman and Chief Executive Officer and the Executive Vice President,
Secretary and Chief Financial Officer have conducted an evaluation of the
effectiveness of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15 as of the end of the period covered by this quarterly
report. Based on that evaluation, the Chairman and Chief Executive Officer and
the Executive Vice President, Secretary and Chief Financial Officer concluded
that, as of the end of the period covered by this quarterly report, the
Company's disclosure controls and procedures are effective in ensuring that
all material information required to be disclosed in the Company's reports that
it files or submits to the SEC under the Securities Exchange Act of 1934 has
been made known to them in a timely fashion. There have been no changes in the
Company's internal control over financial reporting that occurred during the
period covered by this report that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required by Item 601 of Regulation S-K
Exhibit
Number
-------
31.1 -- Certification of Sam Moore, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 -- Certification of Joe L. Powers, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C.
Section 1350 as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C.
Section 1350 as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Thomas Nelson, Inc.
(Registrant)
Date: February 9, 2005 By: /s/ Joe L. Powers
----------------- ------------------------
Joe L. Powers
Executive Vice President
and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit
Number
- -------
31.1 -- Certification of Sam Moore, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 -- Certification of Joe L. Powers, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 -- Certification of Sam Moore, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
32.2 -- Certification of Joe L. Powers, pursuant to 18 U.S.C. Section 1350
as adopted by Section 906 of the Sarbanes-Oxley Act of 2002